IN RE NBW COMMER. PAPER LITIG.

March 11, 1992

In Re NBW Commercial Paper Litigation AMERICAN FEDERATION OF STATE, COUNTY AND MUNICIPAL EMPLOYEES, Plaintiff,
v.
FEDERAL DEPOSIT INSURANCE CORPORATION, in its capacity as receiver of THE NATIONAL BANK OF WASHINGTON, Defendant.

This case is one of the 43 consolidated cases that comprise the litigation captioned In re NBW Commercial Paper Litigation, Master File No. 90-1755. In a status call attended by attorneys from virtually every law firm in the District of Columbia, all counsel agreed to use the action brought by the American Federation of State, County, and Municipal Employees ("AFSCME") as a test case for plaintiffs' claims against the Federal Deposit Insurance Corporation ("FDIC"), in its capacity as receiver for the National Bank of Washington ("NBW").
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By agreement of all counsel, the defendant, the FDIC, in its capacity as receiver of NBW, filed two motions to dismiss. The first motion, if granted, would eliminate all of AFSCME's claims and spell doom for the vast majority of claims in the other 20 cases against the FDIC, which are substantially identical to this one.
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The second motion, if granted, would result in the dismissal of all other claims, including those raised by other plaintiffs, but not by AFSCME.
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Because both motions involve similar issues regarding the common-law D'Oench doctrine and certain sections of FIRREA which may create an absolute defense from liability for the FDIC, much of the court's initial discussion of the law will apply to both motions.

I. The Facts

All 43 cases arise from the failure of the National Bank of Washington ("NBW"). For the purposes of this motion, the court must accept the plaintiffs' rendition of the facts; the facts in most of the cases are not substantially in dispute.
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Washington Bancorporation ("WBC")
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, the holding company which owned NBW, decided to issue commercial paper in July of 1984. NBW served as the exclusive agent of WBC for the purposes of marketing this commercial paper. To support this program, WBC obtained backup lines of credit from various major banks. In 1989, these banks included Marine Midland Bank, Chase Manhattan Bank, Manufacturers Hanover Bank, and Bank of New York. These backup lines of credit were crucial to the commercial paper program because WBC's debt covenants with Mutual Life Insurance Company of New York required WBC to maintain supporting lines of credit that accounted for 50% of its outstanding commercial paper; in addition, the Federal Reserve Bank of Richmond advised WBC that Federal Reserve guidelines also required supporting lines of credit equal to 50% of the outstanding commercial paper.

All of the plaintiffs in the consolidated cases, including AFSCME, were customers of NBW. All of these companies and individuals invested funds through NBW, most on an overnight basis. All claim to have preferred a low-risk approach to investment and to have communicated this preference to the appropriate officials at NBW. A recitation of the facts of AFSCME's particular case is sufficient to explain generally the events which support all of the plaintiffs' claims. Under a Master Repurchase Agreement, NBW agreed to invest AFSCME's funds in appropriate financial instruments and then to repurchase these financial instruments the following day. AFSCME invested solely in U.S. Treasury Notes and other U.S government obligations until early 1988, when NBW offered to sell AFSCME commercial paper on an overnight basis. AFSCME alleges that officers of NBW told them that WBC commercial paper was as safe an investment as the government securities which AFSCME had previously been purchasing. Further, AFSCME claims that at no time were they aware that the commercial paper which they were purchasing was issued by WBC, the parent corporation of NBW.

By 1990, WBC and NBW found themselves in extreme financial difficulty. Because of the financial instability of NBW, the four banks which provided the backup lines of credit supporting WBC commercial paper cancelled their lines of credit in early April of 1990; no other banks could be found to provide alternate lines of credit. At this time, WBC and NBW lacked the cash flow to pay off the vast majority of the $ 45 million dollars in commercial paper that was outstanding. Because, however, investors, such as AFSCME and the other plaintiffs, continued to roll over their money from one overnight investment to another, NBW was not initially faced with the prospect that it would have to default on the commercial paper. AFSCME alleges that NBW did not inform any of the plaintiffs of the failure of its lines of credit (or of the bank's precarious financial position) and that the bank continued to invest their funds in WBC commercial paper. On May 2, 1990, representatives of the Federal Reserve and the Office of the Comptroller of the Currency met with NBW directors to warn them that the further issuance of commercial paper was an unsound practice. On Friday, May 4, 1990, NBW invested $ 1,800,000 of AFSCME's money in WBC commercial paper that was to mature on Monday, May 7, 1990. On May 7, 1990, WBC announced that it was defaulting on the $ 25,800,000 of commercial paper that was to mature on that day; the bank also defaulted on $ 10,900,000 of commercial paper which matured subsequently. WBC filed for Chapter 11 bankruptcy on August 1, 1990, and, on August 10, 1990, the Comptroller of the Currency closed NBW and appointed the FDIC as receiver.

II. Procedural History

Following the procedures set out in the Financial Institutions Return, Recovery, and Enforcement Act of 1989 ("FIRREA"), AFSCME filed an administrative claim with the FDIC, as receiver for NBW, demanding the return of the $ 1.8 million which they had invested in commercial paper. The FDIC rejected this claim within the 180 days allotted by the statute. The FDIC's notice to AFSCME stated:
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After review of AFSCME's claim, the FDIC has determined that AFSCME's claim is totally disallowed. The claimant has not proven its claim to the satisfaction of the receiver based on applicable principles of common and statutory law, including D'Oench, Duhme and Co. v. FDIC, 315 U.S. 447 (1942), 12 U.S.C. §§ 1821(d)(9), 1823(e) and governing principles applicable to the awards of punitive damages against the FDIC.

Letter from FDIC to AFSCME (Feb. 13, 1991). Having exhausted their administrative remedy as required by law, AFSCME filed suit in this court on March 6, 1991, alleging violations of federal securities laws (both the Securities Act of 1933 and the Securities Exchange Act of 1934), various common law claims, and violations of the District of Columbia's Blue Sky laws. Most of the other plaintiffs have filed similar actions, though some raise claims which AFSCME has not. Also consolidated in this action (for pretrial purposes only) are the plaintiffs' related actions against various individual directors of NBW.
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The individual directors have no direct involvement in this motion because they cannot raise the statutory and common law defenses peculiar to the FDIC when it assumes the responsibilities of a failed bank.

Thanks to the efforts of counsel for AFSCME and the FDIC, all parties agreed on October 3, 1991, to stay the consolidated actions pending the court's resolution of the FDIC's motion to dismiss the AFSCME complaint and its motion to dismiss or strike the remaining claims. The parties and the court agreed that resolution of these particular defenses was crucial to the possibility of a negotiated solution. All of the plaintiffs have had an opportunity to respond to these motions, both in writing and orally. The court held oral argument on January 28, 1992, and has attempted to resolve these difficult issues as promptly as possible.

III. The History of the D'Oench doctrine and its Statutory Counterparts

The FDIC does not at this time deny any of the allegations made by the various plaintiffs. Rather, the FDIC argues that it "stands in a different position" than the failed bank and the individual defendants. Jackson v. Brown-Knox & Assocs., No. 88-2273, slip. op. at 16 (C.D.Ill. Sept. 5, 1990). The FDIC argues that it can even admit fraudulent conduct on the part of NBW, yet still assert, as complete defenses to plaintiffs' claims, the protection afforded to the FDIC by the common-law D'Oench doctrine and two statutory provisions of FIRREA. To fully analyze this rather arcane area of the law, the court must first digress with a substantial amount of background material.

In 1950, Congress passed 12 U.S.C. § 1823(e) which barred certain claims against the FDIC which did not meet the statute's stringent writing requirements. Under its original terms, the provision applied only to FDIC in its corporate capacity; FIRREA, however, amended § 1823(e) to apply additionally to the FDIC in its capacity as receiver of a failed bank. § 1823(e) currently reads as follows:

No agreement which tends to diminish or defeat the interest of the Corporation in any asset acquired by it under this section or section 1821 of this title, either as security for a loan or by purchase or as receiver of any insured depository institution, shall be valid against the Corporation unless such agreement --

(1) is in writing,

(2) was executed by the depository institution and any person claiming an adverse interest thereunder, including the obligor, contemporaneously with the acquisition of the asset by the depository institution,

(3) was approved by the board of directors of the depository institution or its loan committee, which approval shall be reflected in the minutes of said board or committee, and

(4) has been, continuously, from the time of its execution, an official record of the depository institution.

12 U.S.C. § 1823(e) (1988).

The writing requirements set forth in subsections (1) - (4) have been strictly adhered to by courts that have considered them. Parties who have piecemeal supporting documentation or who allege that a series of documents would satisfy the writing requirement have generally been denied relief. See FSLIC v. Gemini Management, 921 F.2d 241, 245 (9th Cir. 1990); Beighley v. FDIC, 868 F.2d 776, 782 (5th Cir. 1989). In some cases, parties adverse to the FDIC have been denied discovery that they have alleged would demonstrate the fulfillment of the writing requirements. See FSLIC v. Cribbs, 918 F.2d 557, 560 (5th Cir. 1990); FDIC v. Virginia Crossings Partnership, 909 F.2d 306, 309 - 10 (8th Cir. 1990).

Since D'Oench and the enactment of § 1823(e), the Supreme Court has had occasion to consider this area of law only once. In Langley v. FDIC, 484 U.S. 86 (1987), the purchaser of a piece of property sought to avoid payment on his note on the ground that the failed bank had procured the note by misrepresentations concerning the characteristics of the land. The Supreme Court discussed D'Oench as a precursor of § 1823(e) and held that the term "agreement" in § 1823(e) should be interpreted broadly to encompass conditions on performance. See id. at 92 - 93. According to the Court, petitioner was, in essence, seeking to enforce an oral warranty on the property through an action for fraud. The Court held that § 1823(e) barred such claims and opened the door for an expansive interpretation of the statute. The Court suggested that, if the requirements of § 1823(e) were not fulfilled, only a claim of fraud in the factum, i.e. a forged signature on an instrument, would survive. See id. at 93 - 94.

The FDIC and the plaintiff sharply disagree on the scope of and relationship among the common law D'Oench doctrine and the two statutory provisions at issue. The FDIC's initial memorandum argued that the D'Oench doctrine and the two statutory provisions each independently bar AFSCME's claims; the FDIC, however, provided no theory as to how the statute and the common law fit together and made no attempt to distinguish between the two statutory provisions. AFSCME's opposition sets forth a powerful argument that D'Oench has been completely pre-empted by the passage of FIRREA in 1989; under this argument, any extra protection which the flexible common-law doctrine might have provided to the FDIC was extinguished by the statute. Thus, AFSCME argues, the court need only interpret the statute. Through their numerous subsequent memoranda and at oral argument, the FDIC addressed these issues with a new theory of interpretation which differentiates the two statutory provisions and suggests that D'Oench extends protection to the FDIC beyond that of the two statutory provisions.

The court resolves these issues below, but notes first that the exact interplay of the D'Oench doctrine and the statute does not substantially affect the court's final decision. Over the years, the case law surrounding D'Oench and the statute (particularly § 1823(e)) has cross-pollinated such that it is very difficult to decide where the statute ends and D'Oench begins. See Royal Bank of Canada v. FDIC, 733 F. Supp. 1091, 1095 (N.D.Tex. 1990) (describing how § 1823(e) and D'Oench are interpreted in tandem). Thus, the crucial question is the total protection that the statute and D'Oench together provide. The court believes, however, that an attempt to parse these difficult issues is warranted. Most courts have simply ignored the issue, and few, if any, parties have squarely raised these questions. See Timberland Design Inc. v. First Service Bank, 932 F.2d 46, 51 (1st Cir. 1991) (declining to consider the pre-emption issue as not properly raised). This court has had the benefit of extensive briefing and the excellent arguments of counsel for both sides. It is to the interrelationship of the statute and D'Oench that the court now turns.

A. The Pre-emption of D'Oench by FIRREA

AFSCME argues that the common-law D'Oench doctrine has been pre-empted by the passage of FIRREA, which, they allege, Congress intended to be a comprehensive reform of the banking system. Under this theory, Congress occupied the field of banking regulation by passing FIRREA, thus replacing existing federal common law and obviating much of the need for new common law pronouncements. See Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S. 77, 97 - 98 (1981). Plaintiff notes that the Supreme Court's jurisprudence in pre-emption cases establishes a presumption in favor of pre-emption; Congress need not affirmatively proscribe the use of federal common law. See City of Milwaukee v. Illinois, 451 U.S. 304, 315 (1981). The FDIC urges the court to reject this invitation to abandon D'Oench, a venerable doctrine which has survived and grown for half a century, including over two years subsequent to the passage of FIRREA.

Historically, courts have interpreted § 1823(e) and D'Oench together, drawing from a common body of caselaw. Courts have routinely concluded that both would apply, and thus have found no need to distinguish the two. See RTC v. Murray, 935 F.2d 89, 93 n.3 (5th Cir. 1991); Royal Bank of Canada v. FDIC, 733 F.Supp. 1091, 1095 (N.D.Tex. 1990) (citing cases). In most situations, such interpretation of two legal provisions does not pose a significant problem. In the context of federal common law, however, this sort of interpretation is an anomaly. If a statutory provision is exactly co-extensive with a doctrine of federal common law, the statute controls and the federal common law vanishes because there is no longer a need for it. Only if the common law doctrine is not co-extensive with the statute and the statute does not pre-empt it could the doctrine retain any vitality.

Plaintiff argues that the passage of § 1823(e) in 1950 did not pre-empt D'Oench, but that the enactment of FIRREA in 1989 did. This argument is actually two-fold. First plaintiff argues that FIRREA was intended to be comprehensive -- to essentially wipe out all federal common law in the field of banking regulation. Plaintiff refers the court to the general statements of various members of Congress who touted FIRREA as a comprehensive overhaul of the financial regulatory system.
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The court cannot ignore such statements, although they are commonly made by members of Congress concerning high visibility pieces of legislation, because Congress' view of a program's comprehensiveness is relevant to the pre-emption inquiry. See City of Milwaukee, 451 U.S. at 317 - 19. No one disagrees that Congress intended FIRREA to radically strengthen the regulatory authority of certain government agencies and to reform the banking industry. There is no evidence, however, that Congress intended to sweep away all vestiges of what remained from the previous system. Indeed, Congress re-enacted certain provisions, such as § 1823(e), demonstrating that some (indeed a great deal) of the prior system should remain. Further, Congress is always presumed to be aware of a prevailing judicial interpretation of an existing statute. When, as in the case of FIRREA and § 1823(e), Congress incorporates an old provision into a new statutory scheme, the re-enacted provision is generally assumed to retain its judicially-created gloss, unless otherwise specified. See Lorillard v. Pons, 434 U.S. 575 (1978). Congress is presumed to have understood the relationship between D'Oench and § 1823(e) when it enacted FIRREA. Admittedly, D'Oench has grown to such tremendous proportions that "gloss" may be a misnomer. Yet the very " startling" nature of D'Oench's severity, see Bowen, 915 F.2d at 1015, makes Congress' silence curious. The very fact that § 1823(e) was re-enacted without substantial change by FIRREA (and without comment by Congress) contradicts plaintiff's theory that FIRREA occupied the field to the exclusion of D'Oench.

Nonetheless, while the court rejects plaintiff's "macro"- theory -- that FIRREA obliterates all federal common law in the field of banking regulation, plaintiff's argument also proceeds on another level. Plaintiff argues that the specific statutory amendments made by FIRREA concerning the application of § 1823(e) protection make clear that D'Oench was to be completely pre-empted. The legislative history on this issue is scant. Section 1823(e), originally enacted in 1950, was incorporated by FIRREA without a significant modification, although it was extended to apply to both FDIC-corporate and FDIC as receiver. See 12 U.S.C. § 1823(e) (1991); 12 U.S.C. § 1821(d)(9)(A) (1991). The protection of § 1823(e) was also extended to the RTC, see 12 U.S.C. § 1441a(b)(4) (1991), and bridge banks, see 12 U.S.C. § 1821(n)(4)(I)(i) - (iv) (1991). Plaintiff claims that these statutory amendments are directly related to the line of cases which expanded D'Oench to situations where the original § 1823(e) did not apply. See Beighley v. FDIC, 868 F.2d 776, 783 - 84 (5th Cir. 1989) (extending protection to FDIC-receiver); Bell & Murphy & Assocs., Inc. v. Interfirst Bank Gateway, 894 F.2d 750, 754 - 55 (5th Cir. 1990) (extending protection to bridge banks); Andrew D. Taylor Trust v. Security Trust Fed. Savings & Loan Ass'n, 844 F.2d 337, 342 (6th Cir. 1988) (extending protection to FSLIC). According to plaintiff, these amendments demonstrate that Congress was clearly aware of the developments of the federal common law and, further, sought to address them in FIRREA by completely codifying D'Oench. See City of Milwaukee, 451 U.S. at 314. Having incorporated this judge-made common law into a statute, Congress signalled that D'Oench was no longer necessary.

The question thus becomes whether § 1823(e) pre-empted D'Oench in 1950 (rather than in 1989) and whether D'Oench provides substantive protection more expansive that § 1823(e). Section 1823(e) was inextricably linked with D'Oench for over forty years. Because D'Oench is common law, and hence subordinate to statute, a statute that is coextensive with the common law provision should supplant the common law. Despite the fact that courts have generally construed D'Oench and § 1823(e) together, the continuing vitality of D'Oench throughout these years counsels against pre-emption. Further, some courts have articulated differences in the scope of protection provided by D'Oench and the statute. See, Vernon v. RTC, 907 F.2d 1101, 1106 (11th Cir. 1990);
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Tuxedo Beach Club Corp. v. Federal Sav. Bank, 749 F. Supp. 635, 642 (D.N.J. 1990); Castleglen. Inc. v. Commonwealth Sav. Ass'n, 728 F.Supp. 656, 662 (D.Utah 1989); see also Stillman, supra, at p.109 - 110 & n.13; Note, Borrower Beware: D'Oench. Duhme and Section 1823 Overprotect the Insurer When Banks Fail, 62 S. Cal. L. Rev 253, 270 - 71 (1988). The court is persuaded by these cases and commentators, at least to the extent that they draw distinctions between D'Oench and § 1823(e).

Having held that D'Oench remains a viable common-law doctrine, the court must now define the boundaries set by the statute and then discuss the place that D'Oench serves to fill in gaps left by FIRREA and to further the federal policy to protect the FDIC from certain types of claims. The vague contours of both D'Oench and the statutory sections, however, cannot be understood at all without some discussion of the policy that underlies them. The policy considerations that led to the birth of D'Oench subsequently resulted in the congressional enactment of § 1823(e). Admittedly, the words of the statute provide the best guides to interpretation for § 1823(e) and § 1821(d)(9)(A), but these are by no means unambiguous; case law interpreting the statute has repeatedly focused on the purposes behind the statute. See, e.g., FDIC v. Meyer, 755 F.Supp. 10, 14 (D.D.C. 1991); Royal Bank of Canada v. FDIC, 733 F.Supp. 1091, 1095 (N.D.Tex. 1990). D'Oench, moreover, is nothing more than the policies which created it. Only by understanding what the doctrine attempts to protect can D'Oench be given any meaning. Thus, the court must first lay out the policy considerations (and rhetoric) which have surrounded the application of both the doctrine and the statute. This discussion is especially crucial in a case such as this one which involves a transaction (buyer-seller of commercial paper) that is outside the traditional context (lender-borrower) for the application of D'Oench and § 1823(e). Plaintiff here argues that D'Oench and § 1823(e) have no application to transactions such as that between NBW and plaintiff, whereas the FDIC seeks to fit them into the parameters of a traditional D'Oench case. Thus the issues are not simply what the technical requirements of § 1823(e) and D'Oench are, but rather whether the court even needs to consider these requirements.

D'Oench itself cited a federal policy, revealed in the Federal Reserve Act, to protect the FDIC from misrepresentations concerning the assets of banks which it insures. See D'Oench, 315 U.S. at 456 - 57. Bank examiners must be able to rely on the books of the institutions which they insure in order to make appropriate assessments of solvency. D'Oench sets forth the language which is repeated throughout subsequent D'Oench and § 1823(e) cases: "the test is whether the note was designed to deceive the creditors or the public authority, or would tend to have that effect. It would be sufficient in this type of case that the maker lent himself to a scheme or arrangement whereby the banking authority on which respondent relied in insuring the bank was or was likely to be misled." Id. at 460. Langley reinforces that this policy undergirds both D'Oench and § 1823(e). See Langley, 484 U.S. at 91 - 92. Thus, a court examining whether a particular claim or defense is barred under these provisions must consider whether the transaction at issue -- explicitly an "agreement" under the terms of the statute or an "arrangement" under D'Oench -- would tend to deceive bank examiners.

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